INTERNATIONAL BUSINESS AND DEVELOPMENT ENVIRONMENTAL ECONOMICS Professor Paolo FABBRI Students: Bigi Francesca Barka Saida Putifarri Jasmine Academic year 2014/2015

“The Impact and Economic Cost of Environmental Regulation on Energy Utilization in China” Z. Wang and C. Feng (2014) Retrieved from:

Introduction Purpose of the paper: To reveal the impact of environmental regulation on China's regional total-factor energy efficiency during the period main parts: 1) introduction of China's features in terms of environment 2) analysis of three models: no, weak and strong environmental constraints 3) results of the study and policy implications

Problems and first solutions  Rapid growth but great stress on resources and environment  China's energy consumption in 2010: 19,3% of global level  Measures to solve inefficiency → energy-saving and emission reduction targets, adjustment of industrial structure, elimination of excess capacity  Any result??

Single-factor method VS total-factor method In order to measure the efficiency of energy utilization we can distinguish two methods:  The single-factor method  The total-factor method

Inputs and outputs bias... What do we hope to achieve with the study?? Only economic outputs (GDP) or also noneconomic outputs (pollutants) into the analysis? Including all or just a part of them can change the outcome of the research! This study aims to shed light not only on the general impact of environmental regulation in China, but also on its macro-economic cost.

Statistical Model: DEA Method Region-based Analysis  Sample → 29 provinces, Mainland China divided into 3 regions: - Eastern region - Central region - Western region  Model - Inputs → capital stock; labor; energy consumption - Output → GDP - Constraint → environmental indicator (h = greater the h, more serious the environmental problems)

Evaluation of Environmental Regulation Impact on China’s TFEE 1 st Model → No environmental constraints 2 nd Model → Weak environmental constraints 3 rd Model → Strong environmental constraints Implication Implication: environmental regulation has an economic cost (later discussed...) Empirical Analysis What is the efficiency of these models?  WER almost no changes occur in regional TFEE. Why? Because the environmental tax system not mature enough  SEV high efficiency of this regulation. The nationwide TFEE will increase by 6.39%

However... We find differences in the impact of strong environmental regulation among the three main Chinese regions:  Eastern region  Eastern region → TFEE already at high level/not easy to be further improved under strong environmental regulation  Western region  Western region → backward economy/ no investment in environmental governance = low efficiency on energy utilization = potentially it could be improved by far more than Eastern situation.  Central region  Central region → it falls in between Remind: Enhancing environmental regulation certainly leads to an increase in TFEE, but huge economic costs in nationwide figures → regulation costs & policies.

Environmental Stress Extensive economic development Dependence on fossil energy (coal), with backward technology and outdated equipment high environmental pollution Higher regulation costs: “China’s nationwide regulation cost rose by 4.40 times”

Environmental Stress Environmental stress = Regulation cost Regional GDP  The nationwide environmental regulation cost accounts for more that 5% of the country’s GDP  The rebound ( ) may be due to the contribution of the international financial crisis Source: Z. Wang and C. Feng, p. 3374

Conclusion Strong environmental regulation  high economic costs  threat to economic growth Trade-off between economic development and environment safeguard Recommendations 1.Encourage firms to change their extensive production mode in the direction of green production mode 2.Make special policies for firms willing to apply green production technology 3. As there are differences between the regions, policies need to adapt to the specific situation and background of each region

Thank you…